The Chancellor’s warning of a “cocktail of new threats” to the UK economy shows that deficit reduction must be the top priority for the UK Government, says the Institute of Directors.
A slow start to 2016 for global markets, particularly in China, Brazil and Russia, the ongoing tension in the Middle East and stock market falls were all highlighted by George Osborne in a speech made in Cardiff on Thursday.
Although only just over a week into the new year, economic alarm bells are sounding around the world, with China suspending trading on its stock market twice last week due to heavy losses, as well as the continuing fall in global oil and other commodity prices.
What is the Deficit?
The deficit is the total amount of money a national government borrows, with the UK’s current deficit estimated at just under 5 per cent of GDP. Net borrowing for the UK in 2015-16 is forecast to be £69.5 billion, which is equal to 3.7 per cent of the UK’s GDP.
However, it’s not quite as simple as being just the money that is borrowed, as the deficit can be impacted by a number of macro-economic factors, such as economic growth and the strength of overseas markets who the UK is exporting to.
The “cocktail of threats” that Osborne warned about shows a picture of the global economy that is in sharp contrast to the rosier picture painted by the Chancellor in his Autumn Statement, when he said that the UK economy was “growing fast“.
However, with planned welfare cuts set aside, and targets for borrowing exceeded in 2015, many experts are also warning that the Conservative’s plans for a budget surplus by 2020 may prove to be very difficult.
Importance of Deficit Reduction
With a less positive outlook for the coming year, the Institute of Directors has stated that reducing the UK’s deficit is now more important than ever, to allow the country to cope with any future financial crisis.
James Sproule, Chief Economist at the IoD said: “Osborne’s warning comes at an important time for the world – and British – economy. With turmoil on the stock markets, interest rates still at extraordinary lows, and various surveys painting a less than rosy – albeit more realistic – outlook for the developing world, the UK must be prepared for all eventualities. First and foremost, that means a continued focus on eradicating the deficit.
“85 per cent of IoD members support the Chancellor’s plans to run a small budget surplus by the end of this parliament. They know that without bringing public spending under control, the UK’s debt pile will continue to grow. That means when – not if – the next crisis strikes, it is unclear how well we will be able to weather the storm.
“The IoD warned last year that the Chancellor did not leave himself much room for manoeuvre by relying on a £27 billion accounting windfall in the Autumn Statement to balance the books. Now those concerns have come into sharper relief.
“Without a concerted effort to bring ever rising public spending under control, tax hikes like the apprenticeship levy will always be tempting, and the promised increase in income tax thresholds and cuts to corporation tax may not materialise. The fact the sun seems to be shining a little dimmer highlights the importance of fixing the roof sooner rather than later.”